Arizona Republic
February 28, 2003
Max Jarman

State regulators laid the groundwork Thursday for a competitive wholesale electricity market in Arizona that could lead to lower power bills for consumers and cleaner, more efficient power plants.

The plan was crafted out of the wreckage of the state's electric deregulation rules, which were largely scrapped last year amid concerns they could lead to the high prices and rolling blackouts experienced in California.

Under new rules approved unanimously by the five-member Arizona Corporation Commission, Arizona Public Service Co. and Tucson Electric Power Co. would be required to take bids for part of the power they need to serve their customers. That will create a market for electricity generated by the dozen merchant power plants built in Arizona over the past few years and allow consumers to benefit from the current oversupplied market.

While electricity prices have recently spiked, they are well below prices in 2000 and 2001. And 10-year estimates point to a 30 to 60 percent power surplus in the West due to the recent power plant construction boom.

"This decision gives consumers access to some of the cheapest and cleanest energy available," Corporation Commission Chairman Marc Spitzer said.

APS President Jack Davis said the utility can live with the decision. "It's what we expected," he said.

Besides prices, the utilities also would have to consider environmental factors in evaluating the bids. Coal-burning plants, for example, are cheaper to run than natural gas ones but generally produce more pollution. The commission plans to hold hearings to develop a method of evaluating the environmental cost of electricity from various sources.

The plan locks in the current amount of electricity the utilities can produce from their own regulated plants and requires them to take competitive bids for amounts above that. APS, for example, would have to buy about 2,500 megawatts in 2003, or enough power to light 750,000 homes. It would increase over time as the utility's customer base grows.

APS also would have to consider buying power beyond the 2,500 megawatts if it were cheaper than power produced by its own plants. Its decisions on those purchases would be weighed by the commission in determining the costs the utility could pass on to consumers.

Under electricity deregulation rules passed in 1999, APS was to have spun off its power plants into a non-regulated affiliate this year and purchase all of its power on the open market, half through competitive bids. The potential market drew a dozen new power plants to Arizona in the past two years.

But last year the commission pulled the plug on the plan after a report suggested consumers would be exposed to some of the same market abuses that occurred in California.

The transfer of APS' power plants was halted, and the commission has spent months wrestling with a way to take advantage of low-cost power from new merchant plants while protecting consumers and the environment.

The new plants, including two new facilities developed by APS parent Pinnacle West Capital Corp., would likely bid to supply part of the available 2,500 megawatts.

A code of conduct would prevent Pinnacle West from gaining an unfair edge in the process.

A third-party administrator would be hired to oversee the transactions to prevent market abuses.

The commission also would have the authority to inspect plants to determine if outages were legitimate. In California some producers were accused of curtailing production to drive up prices.

The utilities also would have the option to reject all of the bids if they are too high.